Advanced Audit assignmentTasks:
1. Select the latest annual report of a MULTINATIONAL COMPANY, preferably a
company that has gone through business troubles such as bankruptcy/restructuring etc
2. Gather information about the industry, company and environment using publicly
available data.
3. Familiarise yourself with the latest Annual Report of your selected company.
4. The objective of the project is to understand all business risks and audit risks associated
with the MULTINATIONAL COMPANY selected.
5. If the company selected already gone through bankruptcy, you have to select the
financial report of the company the year before it went into bankruptcy and make the
report as you are standing in time at that particular year (that is an year before
bankruptcy)
6. The project is divided into 3 parts
a. Part 1: Background and Industry Analysis
b. Part 2: Identification and Evaluation of Risks
c. Part 3: Identification of impacts of these Risks on material misstatements (Audit
Risk) and categorisation of these risks using likelihood/impact matrix. Special
emphasis on Fraud risk as highlighted in Chapter 9
(More information about the parts in the next pages)
7. Word count: 2,250 minimum (2500 maximum)
8. Harvard Referencing ( 8 – 10 references, with in-text citations )
(More information in the next pages)
A BROAD STRUCTURE OF THE PROJECT IS AS BELOW:
(You are allowed to deviate from the structure and may provide the report in other formats such
as pictogram / table etc, as long as the objectives of the project are met)
PART 1
UNDERSTANT THE INDUSTRY AND ENVIRONMENT OF THE COMPANY
You are required create Understanding of the Entity and Its Environment, Including the
Entity’s Internal Control
The student will identify the Entity and Its Environment Industry, Regulatory and Other
External Factors
Industry Factors:
Relevant industry factors include industry conditions such as the competitive environment,
supplier and customer relationships, and technological developments. Examples of matters the
auditor may consider include:
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The market and competition, including demand, capacity, and price competition.
Cyclical or seasonal activity.
Product technology relating to the entity’s products.
Energy supply and cost.
Legal and regulatory environment
Environmental/ESG issues
PART 2
Identify the risks that affect the business and subsequently the audit risk of the company.
Elaborate on each risk factors and how they can impact the company. Also suggest methods to
mitigate these risks
EXTERNAL RISKS
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Political Risk
Economic Risk
Legislative Risk
Compliance Risk
Physical Risk
Technological Risk
Market Risk
Financial Risk
INTERNAL RISKS
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Strategic Risk
Operational Risk
Governance Risk
Financial Risk
Part 3
The identified Risks in the above session has to be now mapped to the risk associated with
material misstatement of account or Audit Risk. In this section you will identify how the above
risks will impact Audit Risk
You can look at major balances and transactions at financial statement and consider how the
various risks may affect these balances and transactions (you may take a tleast 1 balances (eg:
trade receivables) and 1 transaction accounts (eg: revenue) from the financial statement and do
a detailed risk analysis of the impact of these risks causing material misstatement). Also
identify issues that can cause fraud as explained in Chapter 9 for both these accounts and use
techniques to enhance detection
At this stage you will also grade the risk by matrix method by identifying the likelihood and
impact of the risk on the financial statement.
For example: The industry in which the entity operates may give rise to specific risks of
material misstatement arising from the nature of the business or the degree of regulation. For
example, long-term contracts may involve significant estimates of revenues and expenses that
give rise to risks of material misstatement. In such cases, it is important that the engagement
team include members with sufficient relevant knowledge and experience.
An understanding of the nature of an entity enables the auditor to understand such matters as:
• Whether the entity has a complex structure, for example, with subsidiaries or other
components in multiple locations. Complex structures often introduce issues that may give rise
to risks of material misstatement. Such issues may include whether goodwill, joint ventures,
investments, or special-purpose entities are accounted for appropriately.
• The ownership, and relations between owners and other people or entities. This understanding
assists in determining whether related party transactions have been identified and accounted
for appropriately. ISA 55011 establishes requirements and provides guidance on the auditor’s
considerations relevant to related parties.
EXAMPLE OF BUSINESS RISK
Covid 19 Scenario:
What are the inherent risks?
What are the control risks?
Detection risk? – how will you do the audit of effectiveness of risk containment for above.
TYPES OF BUSINESS RISKS
EXTERNAL RISKS
▪ Political Risk
INTERNAL RISKS
▪Strategic Risk
▪ Economic Risk
▪Operational Risk
▪ Legislative Risk
▪Governance Risk
▪ Compliance Risk
▪Financial Risk
▪ Physical Risk
▪ Technological Risk
▪ Market Risk
▪ Financial Risk
TYPES OF BUSINESS RISKS – EXTERNAL
Political Risks
▪
Risk from change in government policy
▪
Change in political climate
▪
More prone to affect companies working internationally
▪
Threat of nationalisation
▪
Eg: change of government, change in economic policy, interest rate, inflation etc due to change in govt policy
TYPES OF BUSINESS RISKS – EXTERNAL
Economic Risks
▪
Risk of changes in economic situation like inflation, unemployment, interest rate etc
▪
Increased competition, low cost of production
▪
International companies should consider all the countries in which the company operates
TYPES OF BUSINESS RISKS – EXTERNAL
Legislative Risks
▪
Changes in legislation will result in impacting operations
▪
Eg: environmental legislations – increase cost of production, restriction of sale etc
TYPES OF BUSINESS RISKS – EXTERNAL
Compliance Risks
▪
Risk arising from non-compliance with laws and regulation
▪
Eg: Tax,VAT, CBB regulation on Money Laundering, Stock Exchange Regulation etc
TYPES OF BUSINESS RISKS – EXTERNAL
Physical Risks
▪
Risk to physical and other assets of the company
▪
Eg: Natural hazards, floods, fire, interruption due to loss of power, water
▪
From employees : direct damage by disgruntled employee, Covid 19 interruptions
TYPES OF BUSINESS RISKS – EXTERNAL
Technological Risks
▪
Risk due to new and developing technologies
▪
Eg: Company failing to react to the technological changes
▪
Product obsolescence and losing cost competitiveness etc
TYPES OF BUSINESS RISKS – EXTERNAL
Market Risks
▪
Risk due to unexpected changes in companies market
▪
Eg: new product, increased competition, price wars
TYPES OF BUSINESS RISKS – EXTERNAL
Financial Risks
▪
Risk due to financial factors (or risks in the financial markets). Major components are:
▪
Credit Risk
▪
Foreign Exchange Risk
▪
Interest Rate Risk
▪
Largest risk that affects business in many ways
▪
Problems by trading inn financial markets
TYPES OF BUSINESS RISKS – INTERNAL
Strategic Risks
▪
Risk due to management making a set of bad strategic decisions
▪
Examples
▪
Emphasis on outdated products
▪
Entering unfamiliar markets
▪
Expensive acquisitions
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Poor planning and management
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Lack of focus on key objectives of the company
▪
Poor monitoring of performance
▪
Inadequate information and management systems
TYPES OF BUSINESS RISKS – INTERNAL
Operational Risks
▪
Risk due to the underlying flaws in which the business is carried out
▪
Failure to modernise the product and processes
▪
Poor diversification choices
▪
Poor quality of manufacturing and service
▪
Not addressing low cost competitions
▪
Poor labour relations
▪
Weak marketing
▪
Loss of key employees
▪
Breakdown in relationship with customers and suppliers
▪
Reliance on few products
▪
Lack of research and development
TYPES OF BUSINESS RISKS – INTERNAL
Governance Risks
▪
Risk due to inadequate Corporate Governance
▪
Excessive reliance on dominant CEO
▪
Weak or no existent Independent Directors
▪
Weak or incompetent executives
▪
Ineffective decision making
▪
Poor monitoring of operational decisions
▪
Poor internal control environment
▪
Failure to communicate goals and objectives to employees
▪
Poor Internal Audit function
TYPES OF BUSINESS RISKS – INTERNAL
Financial Risks
▪
Risk due financial structure of the company and operational financial systems
▪
Inadequate cash flow management
▪
High debt
▪
Inadequate investments into future products and modernisation
▪
Inappropriate terms of trade with related parties
▪
System failure and loss of financial records
▪
Internal control weaknesses
▪
Fraud
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